Occurs when an employer withholds too much money from an employeeÂ’s paycheck. Over-withholding means that the employee will receive a tax refund at the end of the year. There is no penalty assessed by the Internal Revenue Service for over-withholding; however, the taxpayer has essentially lent his money free of charge to the government. To reduce withholding, the taxpayer can file a new W-4 form and increase the number of exemptions that are claimed. That will trigger a reduction in the amount of money that is withheld from each paycheck.